Land Use Deregulation Should Be Part of Any Housing Reform Plan

The New York Times reports that at a recent Houston
fundraiser President Bush attributed the collapse of the housing
finance market-and the economic turmoil that followed-to the fact
that "Wall Street got drunk … and now it's got a hangover.
He also went on to note that First Lady Laura Bush had been in
Dallas scouting out the area's housing market for their next home,
noting that both Houston and Dallas seemed to have escaped the
market frenzy and subsequent collapse confronting many other
American metropolitan areas.

In his offhand way the President sort of got it right. The
impact of the housing finance imbroglio on American communities has
been very uneven, and several regions-notably Houston, Dallas,
Atlanta, and Indianapolis-have not suffered the declines in value
or the relative rates of defaults and foreclosures common to
markets in California, Nevada, Florida, and northern Virginia.

What the President may not have realized, however, is that what
distinguishes the less troubled markets like Dallas and Houston
from the very troubled ones like California and Florida is that the
former have less severely regulated markets in land, while the
latter impose tight restrictions on land use that limit supply and,
thus, increase prices. In this neglect the President is not alone:
Neither the media nor the many federal officials involved in the
bailout have acknowledged the role that land market distortions
have played in the mortgage market turmoil.

How Smart Is "Smart Growth?

Simply put, as home prices in these regulated communities rise
much faster than incomes, prospective homeowners are compelled to
take on greater volumes of debt in order to buy a house. At the
same time, many existing homeowners, seduced by the easy credit
available to convert equity appreciation into cash, took on debt
burdens that were beyond their capacity to service.

This land use regulation problem is a relatively recent
phenomenon. Over the past few decades, a growing number of states
and communities have adopted so-called "smart growth strategies
that discouraged new construction and population growth by using
restrictive zoning and tax policies to limit the amount of land
available for development. In recent years the regulatory
mechanisms that have been used in this effort include growth
boundaries, minimum lot sizes, land set asides, impact fees,
mandatory amenities, and building moratoriums. Since all of these
initiatives serve to increase the cost of housing, these
communities are able to both upgrade the demographic profile of
their citizens and limit community population growth by
discouraging moderate-income families from moving in.

A recent study by Demographia reveals the degree to which this
abusive process has made housing less affordable in some
communities compared to others. Using a concept called the "median
multiple (calculated as the ratio of a region's median house price
to its median income), the study was able to rank regions by
affordability. With a median multiple of 3.0 or less rated as
"affordable, Dallas (2.5), Atlanta (2.8), Houston (2.9), and
Indianapolis (2.3) were among the several dozen metropolitan areas
with relatively free markets in land use and where housing was very
affordable. In contrast, regions with restrictive land use
regulations-Boston (6.1), San Francisco (10.8), Miami (7.1),
Washington, D.C. (5.5), and Los Angeles (11.5)-are rated as
"seriously unaffordable. As another indication of the regional
affordability gap, during the first quarter of 2008, the median
sales price of an existing home in Dallas was $142,400, compared to
$701,700 in San Francisco.

Demand Is Not the Problem

Application of the median multiple concept also reveals that in
regions such as Houston, Dallas, Austin, Atlanta, and Indianapolis,
the median house price rose by less than $10,000 relative to median
household incomes from 2000 to 2007. While that may seem like a lot
of money, it is modest compared to what happened in the regulated
markets. Over the 2000-2007 period, house prices in Portland,
Oregon, rose $100,000 relative to incomes. In the Miami, New York,
and Washington metropolitan areas, median house prices rose more
than $200,000 relative to incomes, while in San Diego, San Jose,
and Los Angeles, median house prices rose more than $300,000
relative to household incomes.

These are huge differences, and it might have been expected that
analysts would have noticed them and asked why. Among the few that
have noticed, some attribute the differences to higher demand in
the housing bubble markets. Yet the highest demand has not been in
the markets that have had the least cost inflation! Houston,
Dallas/Fort Worth, and Atlanta are the fastest growing metropolitan
areas in the developed world with more than 5 million in
population. Indianapolis is growing faster than San Diego. People
are moving out of California, New York, Washington, and Miami to
places like Houston and Dallas/Fort Worth. Thus, relative
differences in demand do not explain the differences.

What Is Rationed Is More Costly

In addition to suffering higher rates of subprime exposure, many
of these regulated areas are also suffering from relatively large
declines in house prices as the collapse of the mortgage market has
eliminated the mortgage credit cushion that helped sustain these
artificially high prices. According to the latest S&P/Case
Schiller report on home price trends in the top 20 U.S. markets,
year-over-year house price declines in Atlanta and Dallas fell by
an average of 5.5 percent, while the average price decline in
Washington, Miami, San Francisco, and Los Angeles was 22.7 percent.
And reflecting the impact of high home prices on risky financing
schemes, the percentage of outstanding mortgage loans in
foreclosure in California was more than twice that in Texas during
the first quarter of 2008.

What all of the cost-escalating metropolitan areas have in
common is restrictive land use regulation, which led to a shortage
of land for development. Economics is clear on this issue: What is
rationed is more costly. The differences in the costs of
construction between, say, Houston and San Diego are not that
great. The home price difference is nearly all in land costs, and
land costs have exploded as overly restrictive land use planning
systems have been unable to accommodate the demand attributable to
population increases.

Opening Up the American Dream

These severe land use regulations lead to denying young and
moderate income households the American Dream of home ownership. It
has also led many of these same people to use risky mortgage
finance schemes to overcome the high housing costs these
regulations have caused. In a time when there are increasing
concerns about the rising cost of living over everything from gas
prices to food prices, policymakers should hasten to dismantle the
excessive land use regulations that say "no to the next generation
of American homeowners.

Wendell Cox is a Visiting
Fellow in the Thomas A. Roe Institute for Economic Policy Studies,
and Ronald D. Utt, Ph.D.,
is Herbert and Joyce Morgan Senior Research Fellow, at The Heritage
Foundation.

Share

In a time when there are increasing concerns about the rising costof living over everything from gas prices to food prices,policymakers should hasten to dismantle the excessive land useregulations that say "no" to the next generation of Americanhomeowners.

Rep. Peter Roskam (R-IL) says it's "a great way to start the day for any conservative who wants to get America back on track."

Sign up to start your free subscription today!

Sorry! Your form had errors:

About The Heritage Foundation

The Heritage Foundation is the nation’s most broadly supported public policy research institute, with hundreds of thousands of individual, foundation and corporate donors. Heritage, founded in February 1973, has a staff of 275 and an annual expense budget of $82.4 million.

Our mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense. Read More